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LGPS 'unsustainable' due to cashflow issues, UK think tank warns

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The UK’s local government pension scheme (LGPS) is unsustainable and must be further reformed, a think tank has argued.

Michael Johnson, fellow at the Centre for Policy Studies and a long-term critic of the current LGPS, said the government must revisit the 2014 overhaul of the system and break a ministerial pledge that it would be the last change to accrual rates in 25 years.

Johnson argued that the changes recommended by the John Hutton-chaired Independent Public Service Pensions Commission of 2011 – which saw a shift to career-average benefits instead of final salary-linked payments – were rendered “impotent” by a government decision that effectively meant savings would only be incurred from 2024 onwards.

He also criticised the amended accrual rate of 1/49th, which Johnson estimated was an increase of 63% and would exacerbate future cashflow issues.

“A politically challenging U-turn is required,” Johnson said, referencing the commitment by then-chief secretary to the Treasury that no further changes to public sector schemes, including the LGPS, would be needed for 25 years.

“Fortunately, this foolishness is not set in law.”

Johnson said the LGPS faced a “perfect storm” of underfunding and negative cashflow that would see the system become unsustainable, and that the planned pooling of assets to create six pools would be unable to see off the cashflow problems.

The paper’s criticism received qualified support from City Noble, whose director William Bourne chairs the joint local pensions board for the Lancashire County Pension Fund and the London Pensions Fund Authority.

Bourne agreed with Johnson’s focus on the “looming issues” facing the LGPS, but he took issue with the academic’s criticism of a number of matters he argued were beyond the control of local authorities administering the schemes.

“The nub of the problem is on the liability side and caused by the government’s weak negotiating in previous years,” Bourne said.

“As Johnson alludes, the settlements in 2008, 2010 and 2014 were too generous to the employee.

“In particular, the change from 1/80 to 1/49th accrual rates, which is where his 63% ‘increase’ comes from, was government imposed.”

The risk of the LGPS going cashflow negative was raised during negotiations over the Hutton-inspired reforms, with unions warning of its “massive” impact.